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Can an Ageing Scotland Afford Independence?

Published online by Cambridge University Press:  01 January 2020

Katerina Lisenkova  and
Marcel Mérette
Katerina Lisenkova*
Affiliation:
National Institute of Economic and Social Research and Centre for Macroeconomics
Marcel Mérette
Affiliation:
University of Ottowa
*
E-mail: [email protected]
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Abstract

The aim and scope of this paper is to isolate the effects of population ageing in the context of potential Scottish independence. A dynamic multiregional Overlapping Generations Computable General Equilibrium (OLG-CGE) model is used to evaluate the two scenarios. The status quo scenario assumes that Scotland stays part of the UK and all government expenditures associated with its ageing population are funded on a UK-wide basis. In the independence scenario, Scotland and the rest of the UK pay for the growing demands of their ageing populations independently. The comparison suggests that Scotland is worse off in the case of independence. The effective labour income tax rate in the independence scenario has to increase further compared with the status quo scenario. The additional increase reaches its maximum in 2035 at 1.4 percentage points. The additional rise in the tax rate is non-negligible, but is much smaller than the population ageing effect (status quo scenario) which generates an increase of about 8.5 percentage points by 2060. The difference for government finances between the status quo and independence scenarios is thus relatively small.

Keywords

ScotlandindependenceOLGgovernment spendingpopulation ageingC68E17H53J11
Type
Research Articles
Information
National Institute Economic Review , Volume 227 , February 2014 , pp. R32 - R39
Copyright
Copyright © 2014 National Institute of Economic and Social Research

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Footnotes

Financial support from the Economic and Social Research Council under the grants ‘A dynamic multiregional OLG-CGE model for the study of population ageing in the UK’ and ‘Scottish Centre on Constitutional Change’ is gratefully acknowledged.

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